The swipe fee war between the nation's banks and retailers is over. The banks lost, and new federal caps on how much they can earn when consumers use debit cards to make purchases are set to start Oct. 1.

Under new financial regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law last year, the Federal Reserve approved a 21-cent cap on swipe fees on each debit card transaction plus an additional 0.05 percent of the purchase price to cover the cost of fraud protection. That's far higher than the proposed 12 cents, but it's certainly lower than the current average of 44 cents.

For consumers, the new caps are likely to mean higher fees on checking accounts, and fewer rewards and more restrictions on debit cards, according to Nessa Feddis, vice president and senior counsel at the American Bankers Association in Washington, D.C.

"The obvious impact will be higher bank fees in some form or another," Feddis says.

Farewell free checking?

What form those fees will take is an open question, though Feddis suggests banks might reintroduce monthly fees on checking accounts that don't maintain minimum balances, or experiment with per-transaction fees on debit cards or limits on the number or size of monthly debt card transactions.

Consumers might be able to avoid some of the new fees by consolidating their accounts or switching away from premium checking accounts and debit cards to such other banking services as prepaid debit cards, basic checking accounts or credit cards, on which swipe fees aren't subject to the new caps.

The trend toward more lucrative debit card rewards programs is likely to reverse course, with some issuers already signaling plans to end or curtail such opportunities, Feddis says.

"The rewards might not be as attractive," she says.

Durbin Amendment delayed

The new swipe fee rules were written by the Fed to implement the Durbin Amendment, which was part of Congress' rewrite of financial regulations under Dodd-Frank. The name refers to the amendment's congressional sponsor, Sen. Dick Durbin, D-Ill.

The amendment set off months of intense lobbying by banking groups and merchant associations. A lawsuit brought by TCF National Bank in Wayzata, Minn., seeking an injunction to block implementation of the amendment, ended in a dismissal without prejudice. That means the legal action has been withdrawn but could be reinstated in the future, according to a statement by TCF.

The Fed recently delayed the effective date for the new financial regulation from July 21 to Oct. 1, giving banks more time to comply with the Durbin Amendment and notify their customers of new fees or policies, says Jason Kratovil, vice president of congressional relations at Independent Community Bankers of America, a trade group in Washington, D.C.

"Consumers shouldn't be surprised to see a notice from their issuing institution, alerting them to a change in the terms of their checking account or usage of their debit card," he says.

Smaller banks, fewer options

One wild card included in the Durbin Amendment is the small-bank exemption, which says the swipe fee caps don't apply to financial institutions that have less than $10 billion in assets.

Feddis says the exemption is unworkable and will "disappear as a practical matter," due to competitive pressures in banking and the complexities of the networks that process debit card payments.

Kratovil says community banks and credit unions that are too big for the exemption but too small to make up for lost interchange fee revenues from other operations have few alternatives to implementing higher customer fees.

An informal independent bankers association survey found that monthly fees, limited debit card offerings and even staff layoffs might be on the table to compensate for lost income resulting from this new financial regulation, Kratovil says, adding that smaller banks generally haven't offered lucrative debit card rewards programs, so cutbacks in that area won't make up the difference.

"It's not a huge number of our banks that have debit rewards, in contrast to some of the larger institutions where that's a more standard product offering," he says. "Those that do, have pretty much acknowledged that that sort of product can't last."

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